Incentives and Efficiency in the Market for Management Services: A Study of Canadian Mutual Funds

Michael Berkowitz and Y. Kotowitz

Canadian Journal of Economics, 1993, vol. 26, issue 4, 850-66

Abstract: This paper examines the incentives offered managers of Canadian equity mutual funds when their compensation is based upon the market value of the assets they manage. Although this method of compensation supplies a very weak direct link between performance and the remuneration of managers, the authors show that competition among funds supplies a stronger indirect link. Empirical evidence is provided in the paper indicating that, owing to investor expectations of positive serial correlation in the performance of mutual funds, the indirect compensation offered by asset-based schemes provides a strong incentive to managers to maximize risk-adjusted fund returns.

Date: 1993
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